·Abbreviations:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
C.H. Robinson Worldwide is engaged in the freight and logistics industry. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
Pros:
·The company’s debt relative to its Market Cap is <25%
·Corporate insiders bought shares not too far from current prices in the last 3 months
·The company is cheap using OI/EV (~.1), my preferred relative value measure
·The company appears to have an easy year-over-year OI comparison in the coming quarter
Cons:
·Operating Profit Margins are down sequentially and year-over-year
·The balance sheet only seems fair, exhibiting negative Net Current Asset Value
Those pros and cons and—more importantly—the company’s average ROIC (~23% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $937.1mm OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly fair balance sheet and 5-yr average multiple of PE x 19.7**, I think OI x 10 is a reasonably conservative fair value, which equates to MFV of $39.9.
At a recent price of $93.39, the differential between market value and MFV is 134%, thus I think shares are overvalued.
Conclusion: The ROIC is impressive, especially given that operating margins are significantly lower (~5%). I’m assuming the higher ROIC is due to expansion and/or acquisitions, but the company is too overvalued for me to research that assumption currently. I’ve valued the company four times over the last three years and MFV has been relatively stable ($38.54 three years ago). Also, BV has grown, but only modestly, so this stock may only be a candidate for mean reversion investing, despite the impressive historical ROIC.
I’m putting the company on my watchlist and if shares trade significantly lower, I’ll take a closer look.
My positioning: None
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
-V
*Post prepared using data as of 1/18/23
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.